DOWN 39% IN PAST YEAR
With Union Pacific Railroad shares down big in the past year, some professional money managers are acting as if they stumbled upon a huge "buy one, get one" sale.
Plenty have sold Union Pacific shares, for sure. The stock has fallen off a cliff in the past year — down 39 percent. Shares fell to $68.79 in late January, territory not seen since March 2013.
But the cheap shares and the prospect of a rebound in freight hauling demand has been a major temptation for some investors.
(After all, there are insurmountable barriers to new competitors entering the railroad industry; the chance of one building a new 32,000mile rail network in the Western U.S. is seen as zero.)
HOPES FOR A REBOUND
Some Wall Street analysts say it's a good time to scoop up Union Pacific stock. Here are their price targets for the next 12 months:
"We already own 308,000 shares, and we have been net buying the stock so far in 2016," said Ted Bridges, principal at Omaha-based Bridges Investment Management, which has about $1.6 billion under supervision.
In the short term — through 2016 and 2017 — it's likely to be a difficult haul for U.P., given global economic news that points to a slowdown. And weak commodity prices also will weigh on the company; the railroad is a major hauler of coal, oil, grain and other building blocks of the economy.
Still, these things are cyclical — what goes down usually comes back up again, and so it's likely to go for the global economy and for commodities.
"We think it could be a pretty rewarding holding over the next decade," Bridges said — especially from its current stock price.
Bridges is far from alone. According to records with the U.S. Securities and Exchange Commission that big institutional money managers must file, 10 of Union Pacific's 20 largest shareholders have added to their holdings since September. Some of the buys have been enormous:
Largest shareholder Capital Group, based in Los Angeles, disclosed in its September filing it added 7.3 million Union Pacific shares, bringing holdings to 78.6 million shares, or 9.2 percent of the total outstanding.
Franklin Templeton Investments bought an additional 6.2 million shares, according to the September filings, nearly quadrupling its position, for a total of 8.4 million shares.
Bank of America said in September it added 5.6 million shares, bringing its total to 15 million shares.
Union Pacific, employer of 8,000 Nebraskans, has come to be seen as a bargain by some after shares of the Omaha-based company started getting steadily beaten down over the past year as freight shipments fell.
Last month the nation's second-largest railroad recorded a fourth straight quarter of falling freight demand, the first such stretch since one of six straight quarters that began in mid-2012.
That all comes along with low commodity prices that have hurt Union Pacific shares.
Coal prices are dismal. (The fossil fuel is out of favor with electric utilities, which can also burn cheaper natural gas.) Crude oil-by-rail shipments are down because oil prices are too low to stimulate production. And there is a worldwide glut of grain that has put the kibosh on shipments overseas.
Of the six major freight categories at Union Pacific, shipments in five of them fell in the fourth quarter. For the year, volume was down 6 percent, with an 18 percent drop in coal.
All told, that has some people deeply concerned for the companies such as Union Pacific that port around the stuff that makes the economy go — and for the economy as a whole.
"Nearly every data point in the transportation ecosystem points to the likelihood of a recession," said Matt Troy, transportation industry analyst for Nomura Securities in New York.
"That being said, Union Pacific is our top pick in the railroad industry," he said.
And it is for plenty of others. "In my opinion, Union Pacific is a screaming buy," said Russ Kaplan, head man at Omaha's Russ Kaplan Investments, with about $15 million under management. "It is down because commodity prices are down, and this will change in the future."
Kaplan said he is buying Union Pacific for the accounts he manages as well as his own personal one. Value investors such as Bridges and Kaplan tend to ignore share-price fluctuations and concentrate on fundamentals. Those include Union Pacific's 23 percent return on equity and $524 million in free cash flow last year.
And despite the plummeting shipments, U.P. is still extraordinary profitable, with $4.8 billion of net income last year.
Even the declining coal volumes appear overblown by some: Chief Executive Lance Fritz said in an interview after earnings were released last month that hauling coal is still an outstanding and profitable line of business for the railroad. The company declined to comment on its share price.
Of course, not everyone is waving the Union Pacific cheer flag. Three of the top six institutional shareholders trimmed their positions in recent filing periods — a selloff of almost 8 million shares.
And closer to home, Union Pacific has about 3,900 union workers throughout the U.S. on a version of a temporary layoff called furlough, a payroll-cutting measure adopted amid the freight slump. The company, which employs about 45,000 people operating a 32,000-mile network in 23 Western states, also said last year that it planned to trim several hundred office jobs.
Union Pacific certainly is not alone in facing troubled times: The Standard & Poor's railroads index, of which Union Pacific is a member, fell about 33 percent in 2015. All seven of the large freight-hauling railroads operating in the United States are part of the index, and all shared the same struggles with demand.
But to some investors, none of that changes the fundamental investment thesis on Union Pacific.
"The company will still be in business when agricultural prices and those for other products it handles come back up," Kaplan said.
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